An ideal model to study domain separation during vertebrate central nervous system development is provided by the development of the eye. The eye's neuroepithelial parts develop from a portion of the rostral neuroectoderm, the optic neuroepithelium, that forms the optic vesicle and becomes divided into the future optic stalk, retinal pigment epithelium, and retina. This separation is controlled by a number of signaling molecules and transcription factors including fibroblast growth factors (FGFs), bone morphogenetic proteins, transforming growth factor-betas, the homeodomain proteins PAX6, VAX1/2, and VSX2, and the basic helix-loop-helix-zipper protein MITF. Although many of the relevant players have been identified, their integration into functional circuits is only partially understood. To gain insights into such circuits, we use genetic models in mice and have identified a regulatory loop that is crucial for RPE and retina development and that involves PAX6, MITF, its paralog TFEC, and WNT-regulating signaling factors. The studies show that PAX6, well-known for its pro-retinogenic activity in the retina, has in fact anti-retinogenic roles in the future RPE. Furthermore, we have found that compensatory persistence of expression of the anti-retinogenic VAX proteins in the dorso-proximal and ventral portions of the future RPE limit the FGF-mediated RPE-to-retina transition associated with Mitf mutations to a small dorsal portion. Additional evidence suggests that NOTCH signaling in the distal retina is responsible for limiting the effect of Mitf mutations in the RPE of the ciliary margin. A detailed knowledge on the mechanisms regulating early development in vivo may become important for the generation of retinal and RPE cells from embryonic or induced pluripotent stem cells in vitro. Such cells hold much promise for cell-based therapies in human blindness, including adult onset macular degeneration, and for studying the pathogenesis of such diseases at the molecular level.